Regions Financial Corp. might sell off Morgan Keegan & Co.

BIRMINGHAM, Alabama -- Birmingham's Regions Financial Corp. is exploring "strategic alternatives" for its brokerage and investment banking unit, Morgan Keegan & Co., as regulators announced Morgan Keegan and one of its affiliates must pay up to $210 million to settle fraud charges related to subprime mortgage-backed securities.

Regions said Wednesday that it has hired Goldman, Sachs & Co. to conduct that review. Such alternatives could include selling the Memphis-based subsidiary, which has more than 300 branches in 20 states and a workforce that tops 3,100.

A sale would likely be a positive move for the bank and its shareholders, said John Kottmeyer, a banking professor at Samford University's Brock School of Business.

"The whole brokerage and investment banking unit of Morgan Keegan has really been a distraction .¤.¤. it's been inundated with legal and regulatory issues for the past three years," he said.

Presumably, Regions will be able to sell Morgan Keegan for a fair price, allowing the bank to raise capital, Kottmeyer said.

The move also should allow Regions "to focus much more on basic banking activities of lending and deposit gathering," he said.

Morgan Keegan has been a Regions subsidiary since 2001 and is a valuable franchise, said Regions President and Chief Executive Grayson Hall.

"However, the resolution of this legacy regulatory matter gives Regions greater flexibility with respect to the Morgan Keegan franchise and the ability to explore opportunities that are consistent with our strategic and capital planning initiatives," Hall said in a prepared statement. "Regions is committed to continuing to provide a full range of products and services seamlessly to its customers, including through a continuing relationship with Morgan Keegan."

Regions' announcement came Wednesday at the same time authorities issued details of the settlement, which is the result of an investigation centered on seven proprietary mutual funds sold by Morgan Keegan broker-dealers to more than 30,000 account holders. Those seven funds lost about $1.5 billion during the year ended March 31, 2008.

Morgan Keegan and one of its affiliates, Morgan Asset Management, were accused of making material omissions and misrepresentations in marketing materials and regulatory filings.

The firms also withheld information from the Morgan Keegan sales force, provided preferential treatment to certain customers and failed to adequately supervise their employees, according to the allegations.

The firms did not admit or deny the majority of the allegations.

The investigation was conducted by multiple regulatory agencies. The states' task force was led by Alabama, Kentucky, Mississippi, South Carolina and Tennessee in cooperation with state securities regulators from Arkansas, Florida, Georgia, Illinois, Louisiana, Missouri, North Carolina and Texas.

Of the $200 million that Morgan Keegan and Morgan Asset Management must pay, $100 million will be used to establish an "SEC Fair Fund" and $100 million will be used for a "States' Fund," both for the benefit of investors, regulators said.

A penalty of up to $10 million will be paid to the states that join in the settlement, Regions said.

Two Morgan Keegan employees, former portfolio manager James C. Kelsoe Jr. and comptroller Joseph Thompson Weller, also will pay penalties for alleged misconduct, the Securities and Exchange Commission said.

Under the settlement, Kelsoe agreed to pay $500,000 and be barred from the securities industry by the SEC, and Weller agreed to a $50,000 penalty.

Morgan Keegan was established in 1969 and operated as a public company from 1983 until it became a Regions subsidiary in 2001.

It has more than 1,200 financial advisors and 25 senior analysts covering more than 335 companies in nine industry sectors.

The company's 2010 revenues totaled $1.32 billion, and that figure includes affiliates Regions Morgan Keegan Trust and Morgan Asset Management. If a sale occurs, it would not include Regions Morgan Keegan Trust or Morgan Asset Management.